Essay 2 (Question 3)

e) Blockchain and cryptocurrency regulation-

As the name indicates, a blockchain is a blockchain containing information. At a high level,

the blockchain is a data structure that permits the creation of a digital ledger of transactions
and the ability to share this data among a distributed network of computers. This information
shared is encrypted as an electronic list of 'blocks'. Once recorded information, the data
cannot be erased or changed without changing all existing records. The result is that all
information recorded on the blockchain is highly secured.

To understand blockchain in simple terms, a person transfers the money to their family or
friends from a bank account. For example, a person would log in to online banking and
transfer the amount to another person using their account number. When the transaction is
done, the bank updates the transaction record. It seems simple, but there is a potential issue
that gets neglected. These types of transactions can be tampered with very quickly. People
familiar with this truth are often wary of using these types of transactions, hence the
evolution of third-party payment applications in recent years. This vulnerability is essentially
why blockchain technology was created. Blockchain is a digital ledger that has recently
gained a lot of attention and traction. The blockchain records data and transactions. This
information is often handled in-house or passed through a third party like brokers, bankers, or
lawyers, increasing time, cost, or both on the business. Fortunately, Blockchain avoids this
long process and facilitates the faster movement of the transaction, thereby saving both time
and money. Most people assume blockchain and bitcoin to be used interchangeably, but that
is not the case in reality. Blockchain is the technology capable of supporting various
applications related to multiple industries like finance, supply chain, manufacturing.
However, bitcoin is a currency that relies on blockchain technology to be secure.

Working of a Blockchain-

This technique was initially described in 1991 by a group of researchers. It was intended to
timestamp digital documents so that it is impossible to backdate them or tamper with them.
However, it went by mostly unused until Satoshi Nakamoto adapted it in 2009 to create a
digital cryptocurrency, Bitcoin. The design continued to improve and evolve using a
Hashcash-like method. This eventually became a primary component of bitcoin, where it
serves as a public ledger for all network transactions. The blockchain file reached 20
gigabytes by August 2014 and eventually exceeded 200 gigabytes by early 2020.
The blockchain consists of blocks containing some data, the hash of the block, and the
previous block's hash. The data stored inside a block depends on the type of blockchain. For
example, the Bitcoin blockchain stores the details about a transaction, such as a sender,
receiver, and several coins. A block also has a hash. This hash can be compared to a
fingerprint. It identifies a block, its contents, and its unique just as a fingerprint. Once a block
is created, its hash is being calculated. If a user changes something inside the block, it will
cause the hash to change. In other words, hashes are very useful when someone wants to
detect changes to the blocks. If the fingerprint of a block changes, it is no longer the same
block. The third element inside each block is the hash of the previous block. This effectively
creates a chain of blocks, and it is this technique that makes a blockchain secure.

Every block created contains the hash of the previous block. The first block in the blockchain
is known as the Genesis Block. If there is a tamper with the second block, it causes the hash
of the block to change as well, and that in turn will make block three and all following blocks
invalid because they are no longer stored as a valid hash of the previous block. Therefore,
changing a single block will make all following blocks invalid. However, using a hash is not
enough to prevent tampering. Computers these days are high-speed and can calculate
hundreds of thousands of hashes per second. Therefore, one could effectively tamper with a
block and recalculate all the hashes of other blocks to make the blockchain valid again. So, to
mitigate this problem, blockchain came up with a tool that can solve the problem, i.e. the
Proof-of-work. It is a mechanism that can slow down the creation of new blocks. In Bitcoin's
case, it takes about 10 minutes to calculate the required proof-of-work and add a new block to
the chain. This mechanism makes it very hard to tamper with the blocks because if one
tampers with one block, they will need to recalculate the proof-of-work for all the following
blocks. So, the security of a blockchain comes from its creative use of hashing and the proof-
of-work mechanism.

However, there is one more way that blockchains secure themselves, and that is by being
distributed. Instead of using a central entity to manage the chain, blockchains use the peer-to-
peer network (P2P), and anyone can join. When someone joins this network, he gets the full
copy of the blockchain. The node can use this to verify that everything is still in order.
Blockchains are also constantly evolving. One of the most recent developments is the
creation of smart contracts. These contracts are simple programs stored on the blockchain and
can automatically exchange coins based on certain conditions.
This technology could be used to store medical records, create a digital notary, or even
collect taxes.1

Cryptocurrencies-

Cryptocurrencies like Bitcoin and Ethereum are the most well-known applications of
blockchain technology. They have shaped the public perception of what a blockchain is.
However, the Bitcoin and Ethereum platforms were configured to meet specific requirements
for creating a secure online currency that anyone could access (known as 'open' or
'permissionless' systems). In addition, they were intended to operate in a so-called 'trustless
environment', meaning the participants in the network need not trust each other. Blockchains
can be applied in various ways to create platforms with different properties and features. As
blockchain technology is adopted for purposes other than currencies, the above requirements
may not be carried forward. For example, some applications entail 'closed' or 'permissioned'
systems, limited to a specific group of users. There is likely to be a higher level of trust
among users in such cases, reducing the need for distributed storage and consensus protocols.

Users need to value the coins it tracks for a cryptocurrency to work. This requires users to
trust that their coins are secure. The use of a blockchain should give users confidence in a
tamper-evident ledger of their currency transactions. Further, users should be confident that
nobody can spend the same coin twice (known as 'double-spending').

Early cryptocurrencies were open or permissionless at the user level. For example, in Bitcoin,
anybody can generate a public-private key pair and a Bitcoin address via their open-source
software. Alternatively, they can join a software wallet service online that generates the key
pair for them. To start trading, users can buy Bitcoin from online exchanges or find other
users to trade Bitcoin in person. However, using intermediary services such as wallets or
exchanges requires trust from participants since they store copies of the user's private key.
While Bitcoin itself has not been hacked, several exchanges have resulted in substantial
losses.

Worth of cryptocurrency from a 17-year-old boy

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(https://www.youtube.com/watch?v=SSo_EIwHSd4
The British police caught a 17-year-old in possession of GDP 2 million worth in Bitcoin after
the teen was intercepted for what the cybercrime unit of the police claim to be a
"sophisticated cyber fraud." The teenager created a copycat website of a popular gift voucher
site named 'Love2Shop' and advertised it on Google, duping users into handing over gift
voucher redemption codes worth GBP 6500, which was used to buy Bitcoin. The
Lincolnshire police have said that they seized BTC 48 and other cryptocurrencies after
discovering money laundering links in the case. The police also found over 12,000 credit card
numbers and details of 197 PayPal accounts on the perpetrator's personal computer. The
teenager has been charged with misrepresentation and money laundering and sentenced to a
rehabilitation centre for young people. "Cryptocurrency is often thought, by criminals, to be
an anonymous way to move funds around undetected, but it was highlighted that the police
are now able to investigate offences of this nature effectively.2

Advantages-

Storing a blockchain in a distributed manner has three main advantages.

First, it protects data integrity from tampering with any single centralised party.

Secondly, a Distributed Ledger may be less vulnerable to attack since there is no single
master copy of the ledger to target.

Finally, a Distributed Ledger (DL) is resilient since there is no single point of failure to target
a denial-of-service attack.

Even if several nodes failed, the network would continue to function. However, the major
challenge for a DL application is ensuring that all nodes hold a consistent and up-to-date
copy of the blockchain and that participant/system behaviour is valid and appropriate.

Smart Contracts-

A further platform design consideration is to what extent the platform will support smart
contracts. Introduced by Szabo in 1994, a smart contract is "a computerised transaction
protocol that executes the terms of a contract." A smart contract essentially represents
computer programs that automatically bring about some actions, such as carrying out

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https://gadgets.ndtv.com/cryptocurrency/news/bitcoin-fraud-crypto-seize-uk-police-gbp-2-million-17-year-
old-teenager-2591070
transfers of or executing other actions too, digital assets, according to a set of pre-specified
rules. Smart contracts can automate agreements between parties according to the set of
instructions written into their code. In a blockchain context, smart contracts relate to on-chain
occurrences, in many ways resembling the stored procedures and triggers, which are common
in relational databases.

Can a smart contract be breached?

Since smart contracts self-execute pre-determined codes, it could be argued that they cannot
be breached. The smart contract will always do exactly what it says in its code. Furthermore,
the consensus mechanisms ensure that the relevant smart contracts are executed correctly
(according to their technical specifications) in the appropriate circumstances.

Smart contracts are by their nature limited to the contractual terms that can be specified in
computer-readable code and further limited by constraints imposed by the blockchain system
in which the contract operates. As a result, they cannot capture the real-world complexity of
all but the most straightforward transactions. For example, contractual performance in
transactions that involve digital assets, such as the exchange of crypto-assets, is relatively
straightforward to describe and measure. The ledger then provides a reliable record of the
transactions and contracts executed. However, the complexity of transactions is magnified if
performance involves off-chain, real-world assets. In such cases, performance is harder to
assess.

Where performance is disputed, the parties may seek to address this through negotiation,
arbitration, or litigation. Thus, while smart contracts might simplify execution, they will not
prevent contractual disputes. Nonetheless, the blockchain's consensus mechanisms may give
guarantees about the smart contracts executed and the surrounding circumstances.

Implications of Blockchain Technology on society:

Bitcoin is blockchain's prime application and is why the technology was developed in the
first place. This has helped many people through financial services such as digital wallets. In
addition, it has provided microloans and allowed micropayments to people in less-than-ideal
economic circumstances, thereby introducing new life in the world economy.

The next major impact is in the concept of TRUST, especially within the sphere of
international transactions. Previously, lawyers were hired to bridge the trust gap between two
parties, but it consumed extra time and money. However, the introduction of cryptocurrency
has radically changed the trust equation. Moreover, many organisations are located in areas
with scarce resources and widespread corruption. In such cases, blockchain renders a
significant advantage to these affected people and organisations, allowing them to escape the
tricks of unreliable third-party intermediaries.

The new reality of the Internet of Things (IoT) is already teeming with smart devices that —
turn on washing machines, drive our cars, navigate our ships, organise trash pick-up, and
manage traffic safety in our community. This is where blockchain comes in. In all of these
cases (and more), leveraging blockchain technology by creating Smart Contracts will enable
any organisation to improve operations and keep more accurate records.

Blockchain technology enables a decentralised peer-to-peer network for organisations or apps

like Airbnb and Uber. It allows people to pay for things like toll fees, parking, etc.

Blockchain technology can be used as a secure platform for the healthcare industry to store
sensitive patient data. Health-related organisations can create a centralised database with the
technology and share the information with only the appropriately authorised people.

Blockchain technology can be employed by two parties who wish to conduct a private
transaction in the private consumer world. However, these kinds of transactions have details
that need to be hammered out before both parties can proceed.

To understand the need for authority to regulate challenges faced by blockchain and
cryptocurrency, it is required to discuss a few cases around the globe-

Cryptocurrency case in New Zealand

The recent decision of David Ian Ruscoe And Malcolm Russell Moore v Cryptopia Limited
(in liquidation) [2020] NZHC 728 (8 April 2020) considered the very much unchartered
waters of the legal standing of cryptocurrencies as "property".

The decision is interesting because it is an example of the courts adapting existing legal
concepts to new technologies in this cryptocurrency case. Of course, many would think that
cryptocurrencies would be property, but the judgement noted that it appeared to be the first
time this issue had been before the courts in New Zealand. Given the novelty of the issue, the
court also considered decisions from other courts in England and Singapore. The decision is
also noteworthy because it demonstrates practical difficulties that members of the business
community may have with new technologies - here it was insolvency practitioners, and how
they should deal with cryptocurrencies where there were competing claims.

Cryptopia Ltd. (Cryptopia) operated a cryptocurrency exchange, allowing users to conduct

online trading of many cryptocurrencies. Cryptopia generated income by charging fees for
deposits, trades, and withdrawals. As a result, customers of Cryptopia were able to trade
about 900 cryptocurrencies, more than any other exchange in the world at that time.

In light of the novel legal issues involved and competing claims to cryptocurrency made by
creditors and account holders, the liquidators applied to the court for the determination of:

1. the legal status of the various cryptocurrencies held by Cryptopia; specifically, the
liquidators sought to determine whether those cryptocurrencies fell within the
definition of property as defined by section 2 of the Companies Act 1993; and
2. If they were property, whether those digital assets were held on trust by the company
for the account holders, and the nature of such a trust.

The liquidators needed guidance on those legal issues to assess what assets were the subject
of the liquidation and how those assets should be distributed in the liquidation. Furthermore,
the liquidators' position was further complicated because its creditors and accountholders had
competing claims to Cryptopia's assets.3 Thus, it was required to acquire the authority to
analyse the legal aspect of blockchain and cryptocurrency.

Cryptocurrency in Singapore

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https://www.hopgoodganim.com.au/page/knowledge-centre/blog/cryptocurrency-%E2%80%93-is-it-
%E2%80%9Cproperty%E2%80%9D-and-why-does-it-matter
Singaporean court's decision concerning cryptocurrency trading has implications for
cryptocurrency trading mistakes, smart contracts, artificial intelligence and whether
cryptocurrency is property.

B2C2 Ltd. v Quoine Pte Ltd [2019] SGHC(l) 3, the Singapore International Commercial
Court's first cryptocurrency judgment, is significant as Simon Thorley IJ applies well-
established contractual principles and considers the doctrine of mistake in the context of
cryptocurrency trading mistakes and automated contracts entered through computer
programming. We discuss the key novel points arising from the case and consider the
implications for digital assets, smart contracts, and artificial intelligence.

In B2C2 Ltd v Quoine Pte Ltd [2019] SGHC(l) 3, Simon Thorley IJ sets out important
guidance on applying the law of mistake in circumstances where an automated contracting
system performed legally binding contracts without human intervention. The court had to
decide how to determine the question of knowledge of the parties when transactions were
carried out by computers acting as programmed. The court also had to consider whether
cryptocurrencies constituted property capable of being held on trust and what remedies were
appropriate for breach of contract or breach of trust involving cryptocurrencies.

There are now several reported instances of mistakes occurring concerning cryptocurrencies.
For example, it was reported in 2019 that a cryptocurrency exchange accidentally transferred
cryptocurrency to clients by a computer error. Such situations raise novel issues, which courts
in many jurisdictions across the globe are grappling with, and they are often doing so in the
absence of any direct authority or legislative guidance. Thus, the commercial world felt the
need for authority for e-commerce in the case of blockchain and cryptocurrency. 4

Bitcoin and Cryptocurrency in India

The Reserve Bank of India (RBI) clarified Bitcoin and cryptocurrency trading, informing
banks that they cannot warn customers against trading. The clarification comes as a relief for
the crypto market, which has been dealing with confusion and uncertainty in India. RBI's
statement came in response to the warnings issued by banks to their customers, asking them
not to invest in cryptocurrencies, citing an old order by the central bank. State Bank of India
and HDFC Bank were the big names among the banks that issued these warnings. However,

4
https://www.nortonrosefulbright.com/en/knowledge/publications/6a118f69/singapore-courts-
cryptocurrency-decision-implications-for-trading-smart-contracts-and-ai
the central bank said that its order was set aside by the Supreme Court and cannot be cited by
the banks. Nevertheless, RBI has a huge vote of confidence in crypto amid reports of India
planning a complete ban on crypto trading.
India has softened its stance on crypto. Earlier, there were signs that the Indian government
planned to ban cryptocurrencies. The government had subsequently formed a committee to
give recommendations. However, it suggests that we may not have a complete ban, and
instead, the government may only look to regulate cryptocurrencies.5

Conclusion

Given the diversity of possible blockchain platform designs, no 'one-size-fits all' legal
analysis is possible. Instead, each application of blockchain technology will need to be
considered on its facts. From a legal perspective, centralised platforms are generally likely to
entail lower risks in the reviewed areas. The TTP or group of trusted nodes can be targeted
with regulation and may coordinate compliance, limit the visibility of records, and reverse
past transactions if necessary. Achieving these goals is harder on distributed platforms that
deliberately lack a central administrator controlling the ledger. Finally, concerning EU data
protection law, the users, nodes, and miners of blockchain platforms may be data controllers,
processors, or potentially both if used to process personal data. If so, they will need to
comply with data protection obligations and may be exposed to substantial penalties for
breaches of data protection laws. With widely distributed platforms, even if all parties
involved were deemed joint controllers, it is unclear how they would comply with their
obligations (such as establishing responsibilities by contract and responding appropriately to
the exercise of data subjects' rights). The legal uncertainties and risks associated with the use
of distributed platforms may limit their adoption.

In some cases, technical solutions may be available or be developed to provide greater

certainty and reduce such risks. In other cases, legislators, regulators, and legal advisers are
likely to face significant challenges in designing legal solutions that protect important public
interests without unduly stifling innovation. Although we just skimmed the industry-wide
potential of blockchain applications in this article, the career potential in this field is growing
exponentially. Getting ahead of the game is always a great strategy for any professional.

5
https://www.indiatoday.in/technology/features/story/rbi-clarification-on-bitcoin-and-cryto-trading-here-are-
5-key-takeaways-1809378-2021-06-01